Home/Blogs/Understanding Broadening Top Chart Pattern

Understanding Broadening Top Chart Pattern

10 Oct 2023

Introduction:

To succeed as a stock market trader, a keen understanding of various technical indicators and tools is paramount. You can use them to predict short-term price movements of stocks and determine entry and exit points for your trades. They also indicate the volatility in the stock market, the ongoing trend, the possibility of a trend reversal or breakout, etc.

One such pattern is the broadening top chart pattern. It can help you identify potential price reversals and make profitable trading decisions. It is also known as the megaphone pattern due to its shape resembling an inverted megaphone.

Open Your free Demat Account in just 5 minutes!

This article explores the broadening top chart pattern, its characteristics, significance, and how to use it to make trading decisions.

What is a broadening top chart pattern?

The broadening top chart pattern occurs in price charts, specifically for stocks, commodities, and forex trades. It is a reversal pattern that can appear during both uptrends and downtrends. It is characterized by its distinctive shape, which resembles an inverted megaphone or a widening triangle. The pattern is formed by joining a series of higher highs and lower lows during a trading period, creating a price channel that expands as you go up in the pattern.

The primary characteristics of the broadening top chart pattern include:

  • High volatility

One of the most notable features of the broadening top chart pattern is that it signifies higher market volatility. This increased volatility is often caused due to conflicting emotions among stock market traders, resulting in erratic price movements.

  • Expanding price range

The broadening top chart pattern is drawn by joining a series of higher highs and lower lows, creating a widening trading range over time. The pattern consists of two trendlines – one ascending (upper trendline) and one descending (lower trendline) - diverging from each other at the top. The trendlines form a megaphone-like shape on the chart.

  • Conflicting signals

Unlike other chart patterns such as flags, triangles, etc., the broadening top chart pattern does not provide a clear directional confirmation. Instead, it reflects uncertainty in the market and can give price reversal signals.

  • Volume confirmation

Volume plays a crucial role in confirming the authenticity of a chart pattern. In the case of the broadening top chart pattern, trading volume tends to increase as you approach the top of the pattern, indicating market uncertainty and a conflict between bulls and bears. However, the rising volume may suggest that a trend reversal may be around.

  • Peaks and troughs

Within the broadening top chart pattern, the price of an underlying asset swings higher highs and lower lows. It can help you identify peaks and troughs during a trading period and make informed trading decisions.

  • Trading horizon

The broadening top chart pattern takes some time to form, ranging from weeks to months. This is why it is unsuitable for intraday investors or those with very short trading horizons. However, those plying swing trading with short trading horizons can use this pattern to make informed trading decisions.

Trading strategies with broadening top chart patterns

Trading with the broadening top chart pattern can be challenging due to conflicting signals. Therefore, you must exercise caution and use suitable risk management techniques before making investment decisions. You can also confirm your positions with other technical indicators and detailed chart analysis.

Nevertheless, below are the two common trading strategies associated with the broadening top chart pattern:

  • Breakout reversal strategy

You can look for a breakout reversal above the upper trendline for a bullish breakout reversal or below the lower trendline for a bearish breakout reversal and take trading positions accordingly. However, you must confirm the breakout with other technical indicators, such as moving averages or oscillators. Additionally, remember to put stop-loss orders to manage your risks as markets can be volatile.

  • Range-trading strategy

Another option is to trade within the expanding price channel by buying stocks near the lower trendline and selling them as they approach the upper trendline. Such a strategy suits traders who prefer marginal profits with short-term trading horizons.

To conclude

The broadening top chart pattern can be identified from its distinct shape, resembling an inverted megaphone. It can help you identify breakout reversals or trade within a price range with short-term trading horizons. However, the signals can be confusing, and thus, you must confirm with several other technical indicators and chart analysis before making your trading decisions.

Should you need a Demat account to begin your stock trading journey, you can visit Motilal Oswal’s website and open it within a few minutes.

 

Related Articles:  How To Trade In A Sideways Market | What are Dual Class Shares | Guide to Understand Ascending Broadening Wedge Pattern

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C